Japanese investors are seeing positive yields on currency-hedged US Treasuries for the first time in over two years, driven by the Federal Reserve’s interest rate cuts and a narrowing gap between US and Japanese short-term rates. This shift in yields could reignite Japanese interest in US debt.
Yen-hedged 10-year US Treasury notes currently yield 0.28%, surpassing the zero mark after remaining negative since September 2022. The primary driver of this change is the significant reduction in hedging costs, which have fallen approximately 170 basis points from their October 2023 peak. This decline stems from the Federal Reserve’s shift towards monetary easing, coupled with the Bank of Japan’s (BOJ) interest rate hikes, narrowing the difference in short-term interest rates between the two countries.
This positive yield environment enhances the attractiveness of US bonds for Japanese investors. Eiichiro Miura, head of the strategic investment department at Nissay Asset Management Corp. in Tokyo, noted that these positive hedged yields increase the investment appeal of US bonds and may lead to a more positive outlook among investors in the upcoming fiscal year, starting in April.
While the current hedged Treasury yields, roughly a quarter of what 10-year Japanese government bonds offer, might still be considered insufficient by many local investors, there’s a notable trend of Japanese investment in unhedged US debt.
According to Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. in Tokyo, the recent influx of Japanese capital into US bonds likely reflects investors seeking foreign exchange gains. With US yields exceeding 4%, investors are strategically positioned to capitalize on potential gains from both rising bond prices and currency appreciation when opportunities arise to buy the dollar on dips against the yen. Data from the Ministry of Finance, compiled by Bloomberg, reveals substantial net purchases of US bonds by Japanese investors: ¥15.1 trillion ($96 billion) in the first ten months of this year, following a record ¥20 trillion for the same period last year.
The yen weakened approximately 7% against the dollar between January and October, despite two policy tightening moves by the BOJ during that period. This depreciation is about half of what was observed during the same timeframe a year earlier. Experts anticipate a continued slow pace of interest rate increases by the BOJ. Keisuke Tsuruta, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, believes the BOJ’s gradual approach to rate hikes will likely limit any significant decrease in currency hedging costs for Japanese investors. This suggests that the current environment of positive hedged yields on US Treasuries for Japanese investors may persist.
In conclusion, the shift to positive yields on currency-hedged US Treasuries presents a significant development for Japanese investors. While yields remain relatively low compared to domestic options, the trend reflects broader changes in global monetary policy and highlights the ongoing interplay between the US and Japanese economies. The future trajectory of interest rates and currency exchange rates will be crucial in determining the long-term attractiveness of US debt for Japanese investors.
